Financials took a bit of a beating on Monday, but the sector-wide selloff may have been a good thing for traders. The Financial SPDR (XLF) has been locked in a long-term rally since late 2011, and pullbacks to the ETF’s 52-week moving average have marked excellent entry points for long positions on sector members.
One specific member, Bank of America (BAC) has also pulled back to key support, representing an opportunity for savvy options traders.
Technically, BAC stock price has risen steady since bottoming near $15 in late March/early-April. During this time frame, BAC stock has gained nearly 10%, rallying along support at its 10- and 20-day moving averages. Furthermore, the rally has pulled BAC’s 50- and 200-day moving averages into a bullish cross — a technical formation that often precedes additional short-term gains.
An extended rally was briefly delayed this week, after BAC encountered resistance near $17.75. A Greece-induced pullback has helped blow off some steam for BAC, and the stock is now perched on support at its 10-week moving average. In today’s trading, BAC has pushed back above former support/resistance at $17, marking a potentially solid entry point for a long position on the shares.
Outside of BAC’s technical performance, the stock has garnered a somewhat bullish following among Wall Street analysts — but there is room for improvement. For instance, Thomson/First Call data reveals that BAC stock has attracted 18 “buys,” 11 “holds” and two “sell” ratings. Additionally, the 12-month price target of $18 represents a meager premium of only about 6.6% to Monday’s post-selloff close.
Any upgrades or price-target increases could bring additional buyers to the table.
Click to Enlarge Elsewhere, options traders are warming to BAC stock. Currently, the July/August put/call open interest ratio rests at a middling 0.88, with calls and puts near parity with each other. This ratio rises to 0.97 when we look at just the July series of options.
Taking a closer look reveals that peak July open interest totals 80,923 contracts at the currently at-the-money $17 strike. On the other side, peak put open interest for the July series totals 54,889 contracts at the out-of-the-money $15 strike.
Overall, implieds are pricing in a potential move of about 4.7% for BAC stock ahead of July option expiration. This places the upper bound at $17.80, while the lower bound lies at $16.20. Traders should also note that Bank of America will report second-quarter earnings on July 15, two days before July options expire. Wall Street is currently expecting earnings of 36 cents per share on revenue of $21.3 billion.
2 Trades for BAC Stock
Call Spread: Those traders looking to side with the bulls might want to consider an Aug $17/$18 bull call spread. At last check, this spread was offered at 37 cents, or $37 per pair of contracts. Breakeven lies at $17.37, while a maximum profit of 63 cents, or $63 per pair of contracts, is possible if BAC closes at or above $18 when August options expire.
Put Sell: Alternately, if you’re skittish about a BAC rally, but you don’t think the stock is set to plunge anytime soon, you might want to consider a July 16.50 put sell. At last check, the July 16.50 put was bid at 23 cents, or $23 per contract.
The upside to this put sell strategy is that you keep the premium as long as BAC stock closes above $16.50 when these options expire. The downside is that should BAC trade below $16.50 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $16.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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